Your Money: Investing amid Bernanke's folly

Posted: September 19, 2012

What does the Federal Reserve's bond-buying program have to do with creating jobs and reversing unemployment? Absolutely nothing, but the Fed is doing it anyway.

Maybe more important is, what does it mean for our portfolios?

The central bank said last week it would start buying $40 billion worth of mortgage-backed securities a month, continuing with a third round of its wacky bond-buying program, which it claims will also boost the economy and create jobs.

"Manipulating the bond market, and inflating reserves for the major banks, does not create end-demand for businesses," wrote Lance Roberts of streettalklive.com.

Maybe, but the move leaves investors puzzling how to adjust. One longtime Wall Street axiom is "don't fight the Fed." And as the Fed also will endeavor to keep interest rates low through 2015, this penalizes savings in bank accounts.

However, the following asset classes could benefit under the Fed's expanded bond-buying program. In particular, these are assets that perform well as a result of a devalued dollar and inflation, which many investors expect will spike under the central bank's policy of buying Treasurys and other bonds:

Commodities, particularly food and energy.

Master limited partnerships.

Banks, brokers, lenders, and anyone else capitalizing on continued cheap credit and low interest rates for the next three years.

Precious metals.

What to avoid because of low rates and possibly resultant inflation: Fat savings accounts, and consumer-goods companies, as profits may be pinched by higher commodity prices.

Master limited partnerships, which are toll-takers in the energy pipeline world - midstream operators that maintain pipelines transporting energy, storing, and processing energy - are worth examining. These securities have complicated tax implications, so check with your adviser or broker before purchasing.

Many MLPs need loans to be able to expand their pipeline operations. They will for the foreseeable future be able to borrow money at exceptionally low rates to buy assets and fund growth, notes John Dowd, a Fidelity Investments portfolio manager who runs the Fidelity Select Energy Portfolio Fund (FSENX).

"When financing is available and cheap, MLPs do well," Dowd said.

One option is to buy shares in the five largest MLPs in the Alerian MLP exchange-traded fund (AMLP): Enterprise Products Partners (EPD), Kinder Morgan Energy Partners (KMP), Magellan Midstream Partners (MMP), Plains All-American Pipeline (PAA), and ONEOK Partners (OKS). Combined, they account for more than 40 percent of the exchange-traded fund and a large share of its performance.

Bonds and equities

What about income? A strange shift is taking place, according to David Rosenberg of Gluskin Sheff. In the 1980s investors bought equities for capital appreciation and purchased Treasuries for yield. Today, investors do the opposite.

They are "gravitating to the equity market for yield. Moreover, investors are not buying Treasury notes for yield anymore, but for the capital gain they generate," Rosenberg said.

Among large-cap, dividend-yielding stocks are Intel, with a 3.85 percent dividend yield. Also consider Verizon Communications, with a 4.5 percent yield, Philip Morris International at 3.8 percent, Conoco Phillips at 4.55 percent, and Dow Chemical at 3.98 percent.

Finally, what of precious metals? Bill Gross, head of the massive PIMCO bond mutual funds in Newport Beach, Calif., told Bloomberg Television recently that stocks and bonds wouldn't perform as well as gold.

"In this period of central bank expansion . . . [the Fed is] basically printing money," Gross said. "Gold can't be reproduced.

"I am not a gold bug. I am just suggesting that gold is a real asset and will be advantaged if the Federal Reserve or the ECB central banks start to write checks in the trillions. I just think [gold] will be higher than it is today and certainly a better investment than a bond or stock, which will probably return only 3 percent to 4 percent over the next five to 10 years."


Erin Arvedlund is a finance reporter and a resident of Philadelphia. Contact her at erinarvedlund@yahoo.com or 646-797-0759.

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